One should avoid VPF in a falling interest rate scenario and instead deploy the money in mutual funds, preferably through a SIP.
The interest rate on your employees’ provident fund (EPF) is coming down. For 2017-18 the Central Board of Trustees (CBT) has suggested 8.55 per cent, a 10 basis points reduction over 8.65 percent given by the fund in the previous year. For 2015-16, your PF corpus got a return of 8.8 per cent.
In such a situation, does it make sense to make use of the Voluntary Provident Fund (VPF) window to raise your PF contribution beyond the mandatory limit of 12 per cent of basic salary? Under VPF, an employee can increase the contribution to 100 per cent of basic.
Personal Finance experts believe that the VPF window should be avoided in a falling interest rate scenario. They feel that additional investable corpus can be deployed in mutual funds, preferably through a SIP, for potentially higher returns.
“A lot of employees save beyond the mandatory limit to take the benefits of higher tax-free interest. However, it is wiser to do an equity SIP instead which can yield much higher returns. Raghvendra Nath, Managing Director – Ladderup Wealth Management told Moneycontrol.
Nath believes a SIP is one of the best ways to create a good retirement corpus. “There is simply no substitute for SIPs in diversified mutual funds to create a sizeable corpus for retirement. Equity SIPs are simple, regular, lock-in free, yield higher returns and now has just nominal taxation. The only thing is that it requires discipline on the part of investors as it is not a forced locked-in saving which EPF is,” Nath said.
Dinesh Rohira, Founder & CEO, 5nance.com agrees. “A continued decline in EFP rate over a year doesn’t justify a need to raise PF contribution beyond a mandatory limit. Rather an employee can look forward to invest into conservative hybrid mutual funds which has a better potential to yield higher returns from a long-term perspective,” he said.
Rohira says if one has already given a mandate for the higher contribution it could be continued if it takes care of the debt allocation in the portfolio. “One can continue the higher investment in PF if it is taking care of debt allocation of overall portfolio. PF provides safety and better returns than traditional debt instruments. However, for investor who has age on his side and risk taking ability, can reduce allocation and divert investment towards equity & equity-related mutual funds to build corpus for their retirement,” he said.Raghavendra Nath believes EPF interest rates are likely to come down further. “The government has to gradually bring the EPF rate at par with the bank deposit rates as well as the small savings rate. The EPF rates have been artificially pegged higher and the burden has to fall on all the tax payers. Successive governments have only made minor reductions in rates fearing political fall-out. The more these structures are market-linked, the better it is for both the country and the savers,” he pointed out.